All this will no doubt help Nokia come up with better, if not magic, products. The firm may even reach its goal of 300m users by the end of 2011 because its efforts are not aimed just at rich countries, but at fast-growing emerging economies where Nokia is still king of the hill, such as India. There, services such as Nokia Money, a mobile-payment system, and Life Tools, which supplies farmers with prices and other information, fulfil real needs, says John Delaney of IDC, another market-research firm.
Which only strengthens my view that their path to salvation lies in (yet another) complete re-invention, this time to a 21st century, sixth paradigm, retail financial services platform (built on a mobile substrate.) They might even want to keep (at least some of) their handset engineering know-how: it might come in handy for building handsets that are particularly well adapted to mobile financial services.
In any event, if Nokia want their share price to go up, they better hurry up and change their frame of reference. I mean really, who would you rather compete with? Apple? Google?
When speaking to start-up investors about their track record most of the time the conversation revolves entirely around the investments they have made in the past. The winners, the losers and why. More rarely do people talk about the investments they didn’t make. This is understandable for a number of reasons, one of the most important being there is usually no obvious record to fall back on and there is no way to short bad start-ups. So one relies on the investor keeping track of the investment opportunities they looked at and passed on, and further keeping tabs on how these companies did. Not many investors do this – at least not publicly, one (great) exception being Bessemer who with great humor points out their heroic misses – opportunities they declined that turned out to be home runs – in what they term their ‘anti-portfolio.’ But it would also be interesting to see a record of the deals an investor didn’t do that failed. But this is even harder (if one is to avoid noise) – even a small, relatively new investor like us sees hundreds of proposals and even this depends on what one considers as having ‘seen’. Is it an email in passing saying XYZ is raising money, would you like to look? Is it spending a few hours going through an executive summary / pitch book / website finding out more? And it is also important (if this information is to be meaningful) to qualify why the investment wasn’t made. Is it because it didn’t fit a certain sectoral or geographic investment criterea? ie Good prospect but not for us. Is it because of a conflict with an existing portfolio company? ie Good idea but we like these guys better or they were first in the door and now we’re stuck. Is it because of apathy or lack of resources (time, money)? ie Good idea but just can’t focus and isn’t top of the list? Or is it because, well it’s just not a very good opportunity? ie Mediocre or downright bad idea.
In order to have the discussion, an investor needs to keep a record of all of this. How many do? We are trying to – or at least have plans to do so – but I’ll admit it’s harder than it sounds. It’s not something that generally gets anywhere near the top of a priority list, when the days are filled with making and managing the investments you do make. (And when you are trying to raise capital and/or keep existing investors happy or informed if you are a professional.) Don’t get me wrong, it’s not rocket science and I think it probably comes down to spending a bit of time and energy upfront to put a workflow in place to be able to capture and manage this information efficiently. And to be truly useful, this record needs to be ‘timestamped’ and auditable: we all suffer from hindsight bias. ie We definitely would have invested in Google given the chance, and obviously we passed on Webvan….
OK, fair enough, but why is this important? It’s because I think knowing which investments (and why) an investor didn’t make, and comparing these to the ones they did make, is a much better way to analyze their skills and approach. I think this is true in any asset class, only in most (all?) others it is practically impossible to do the kind of analysis I describe above if they are a long only investor (private equity perhaps being the exception.) Of course for long/short hedge funds this type of thinking is embedded in their performance.
Nauiokas Park is too new for this kind of analysis to be relevant but I was thinking about it in the context of my prior angel investing experience. I didn’t keep a complete record but there are a few deals that come to mind, two of which I was fortunate enough to blog about before the outcome was known, one after (discount appropriately) and so are public record. Hopefully you’ll trust me on the other two.
The first example is a company called SpiralFrog which is now the poster child for the second wave of bad ‘internet’ investments. I was approached in early 2006, through my Wall Street/City network to look at this, as people new I was interested/knowledgeable about “tech” start-ups and had had some success as an angel investor. When I saw the prospectus (and yes it was a prospectus) and looked at who else was involved as investors, I was immediately suspicious: this wasn’t a nimble start-up, it was packaged like a Wall Street deal – the scale and approach were way too heavy. Looking into the plan and the projected financials it just got worse. I passed and when they launched to considerable fanfare, I wrote this in September 2006 and followed up with this a year later.
The third is Powerset. What attracted me was the great team they pulled together and my conviction that semantic technologies were going to become increasingly important and valuable. I didn’t directly have the opportunity to invest but was one degree away and think I could have if I had agressively pursued.
Zopa is the fourth. I was approached by a friend when they were raising their initial outside round. I loved the idea but didn’t think it could get traction – at least not enough, fast enough to disrupt the market it was targeting, especially given how free and easy it was to get credit (something I new about…) I think I was right then. But I still love the concept and would be open to taking a closer look again in the future should the opportunity present itself. My focus would again be on understanding whether or not they can scale and whether or not the business model is optimal.
The final example is Skype. I didn’t directly have the chance to invest, but again at one degree of separation I could have tried. That said, I’m pretty sure had I been given the opportunity I would have passed: I didn’t see (until everyone had figured it out) how it could be a good investment despite loving the product. I’ve changed my mind and if I were running a big private equity fund, I’d definitely be trying to run my slide rule over them to see if I could make eBay a better offer than the public market.
Good investing is about managing your failures, your losing trades. The best way I know of doing this – whatever the asset class – is working hard to figure out what could go wrong before putting on the trade. (I guess it’s the bond trader in me…) There is always something that can go wrong. If it is big or likely enough you should pass. If not, by having a clear understanding and focus on these risk factors, you give yourself the chance to adapt and/or mitigate before its too late. This is especially true in venture investing as many risk factors in these companies tend to be endogenous; obviously if your basic premise turns out to be wrong that’s tough (but not impossible) to mitigate and sometimes it doesn’t work out. But by actively knowing what is going wrong and why at least you can avoid throwing good money after bad while also knowing when the odds are in your favor and you should double down.
If I had a billion dollars. (If I had a billion dollars.)
Well I would buy you a Skype. (I would buy you a Skype.)
I would buy a Twitter for your Skype (so you could tweet and chat and call all your friends.)
The news has left many in the industry wondering if eBay will put Skype, which it paid a hefty $2.6 billion to buy in 2005, on the auction block. Donahoe had said last year that eBay would consider selling the business unit if it couldn’t be integrated with its auction or PayPal payment system.
And according to statements made during the conference call, it looks like Donahoe doesn’t think there is much the Skype technology can do to help eBay’s other businesses. When asked what eBay was doing to add shareholder value to Skype, Donahoe admitted that “the synergies between Skype and the other parts of our portfolio are minimal,” the paper said.
Well if it were up to me, I’d sell eBay – maybe Ken Lewis at BoA might be interested, would look innovative and might distract the federales from the Afghanistan that is the Merrill acquisition – and keep Skype. eBay could have been the Betfair of consumer goods, instead it became the Microsoft of marketplaces…
Anyhow, I’d buy Skype. Maybe not for $2 billion, but I think it is potentially a very valuable asset and I’m convinced that it is not even scratching the surface of its potential. The problem is that they seem to be trapped in linear thinking with respect to their business model. Selling minutes and add-value telco services. A telco. An alternative and innovative telco. But a telco. Nothing wrong (well you know what I mean…) with telcos but if you want to buy a telco, buy BT – its a lot cheaper. And its not just management (that can’t think out of the box) – it’s the press, analysts etc:
So an acquirer would likely be buying Skype for its 370 million registered users, which is nothing to sneeze at. But the big question is how much money can be made from these users? Sure, people love using Skype’s free services, but most of its revenue is made from a small portion of its users. Skype generates most of its revenue from its SkypeOut service, which charges users to make calls from the Skype service to regular landline phones and cell phones.
The SkypeOut revenue stream is sufficient to sustain Skype’s business model today, but as IP networks are deployed throughout the world and all communications becomes IP-enabled, there will be fewer opportunities to make money from connecting Skype calls to the regular phone network. What’s more, as Skype adds more subscribers, those users are more likely to talk to one another over the free Skype-to-Skype network rather than paying to call these friends and family on regular phones. Of course, it will likely take years for this scenario to play out, but this fact could color a potential acquirer’s willingness to pay a premium for the service.
“As more people adopt Skype, there’s potential for the asset to peak in value,” Friedland said. “It won’t likely happen for another five to eight years. And unless Skype comes up with a new meaningful revenue driver, it could start to decline.”
370 million registered users. Three hundred and freakin’ seventy million. And growing. Fast. And more people joining is a bad thing?!?
Let’s just pause here for a moment. So Mr. Friedland, if Skype ended up having say one or two billion – BILLION – registered users and so like became the de facto communications substrate for the vast majority of the connected citizens of the planet, that would be…ummmm…bad?
There are a hundred and one ways to bootstrap amazing, profitable, cash generative businesses off of Skype’s brilliant platform and installed base, and they are all in my new book: Managing Skype for Dummies. Actually, I didn’t write it. And it’s usual title is the Cluetrain Manifesto but still…
1. Markets are conversations.
I don’t know what Meg was thinking (those of you who listened to the eBay analyst webcast and pored over the accompanying presentation the day eBay announced it was buying Skype will surely remember that at the end of both you were even more confused than at the beginning…) But even if it was by accident, she was on to something (admittedly she did get a bit punchy with the pricing, although if she had paid in paper instead of cash…) It’s just that that something wasn’t being able to call EvilRabbit467 and haggle over the price of an iPod nano to ‘close the deal’…
Seriously if I was the captain of some vast private investment capital pool, I would be sitting around with my partners and a handful of clever young associates and putting together a plan for Skype. But if I were Donahoe, I’d spin Skype out to my shareholders as a separate listing, this would create value and possibly more importantly, especially in these interesting times, give Skype an explicit valuation and an acquisition currency. Then it gets interesting.
So the internet destroyed distance. Â It took a few years but the death of ‘long-distance’ fixed line telecoms pricing but, helped along by the entrepreneurs and engineers behind things like Skype, it was inevitable that the historical business model of telecom monopolies were destined for the dustbin. Â Yeah, yeah, yeah…ten year old story…so what, boring.
Ok. Â But why on earth does the parallel extortionate business model live on in the world of mobile telephony? Â International roaming charges are a joke, Â especially if you are using the same provider on both sides of a border, but even if you are not; Â ie they don’t make any economic sense (there is very little incremental underlying costs, at least not any that aren’t artificial) and they are extremely annoying and unfriendly to what are generally these companies best customers. Â I don’t know anyone who is happy with their mobile phone provider; Â it goes from grudging indifference through to outright hatred. Â And yet these companies continue to be successful. Â How long can this last?
As a frequent traveller within Europe, and a cost-conscious entrepreneur, I find myself very frustrated and limited by this state of affairs and often find myself using texts and missed calls to arrange for later calls (via skype) rather than bleed money to take a roaming call. Â So when I heard of a new mobile offering that would allow me to use one number, one account, fungible credits across 21 countries, I had to sit up and take notice (via NetworkWorld):
The service allows prepaid subscribers travelling between participating countries to recharge or top up their accounts using airtime vouchers from any participating country. Pre- and post-paid customers will be charged the local rate in the country from which they are calling, and travelers will receive free incoming calls.
Wow sign me up. Vodafone? Orange? T-mobile? O2? Yeah, right… Try MTN! And its just playing catch up with the competition (Zain’s One Network.) MTN’s tag line?
One Africa. One Rate. Thatâ€™s the Spirit.
Gee, good thing I live in the EU…where I guess the equivalent would be along the lines of:
One Europe. Many Rates. Eat Shit.
But don’t mistake me, it’s not a problem that the bureaucrats in Brussels should be responsible for solving, and I’m not so naive to think that the incumbents will be able to adopt disruptive business models, but where are the entrepreneurs??? There has to be an opportunity here – the number of people who live “in Europe” (as opposed to just withing one European country) is large and growing and will continue to grow.
The challenges faced by entrepreneurs in Africa and elsewhere in the developing world are often formidable and extend beyond the usual (already tough) stumbling blocks that ‘western’ entrepreneurs struggle with. However, the ‘developing’ entrepreneurs sometimes have a small but important advantage – in the markets in which they hope to operate, there often isn’t a “way it is supposed to be done.” They have lots of ways of failing (and lots of people telling them they will) but usually it is not because they are seen to be taking an innovative (read: dangerous) approach to business. I was reminded of all this when I finally got a chance over the past couple days to listen to this great presentation/discussion by Ethan Zuckerman and Eric Osiakwan given last fall at the Berkman Center.(Unfortunately the Berkman website does not offer an embed code, so you can’t watch it here but worth clicking on the link above.) Thanks to my friend Juliana – who is also a newly minted TED Fellow (well done!) – for sending me the link (several months ago!)
The existence of a digital demographic barbell* – generation Y/M + seniors – is something I’ve observed and have been talking about for several years. Indeed I became more confident of this thesis about 3 years ago when my parents came to visit and I saw my Dad spending an hour or so a day on the web (mainly checking weather, stocks and local (back home) news.) So I was nodding in agreement when I stumbled upon this recent article from the Spectator, ‘Wired, retired and so hip it hurts’:
On a personal level I can see evidence of a new approach to technology taking place. My parents-in-law do not consider themselves to be technophiles, but they were the first people I know who downloaded Skype. Skype, a VOIP (Voice Over Internet Protocol) application, allows you to use your computer like a telephone and â€˜talkâ€™ through the microphone to other computers for free. Next they added a webcam as they wanted to be able to video-chat with their three young grandchildren in Paris. After quizzing my friends about their experiences with their own parents, I realised that digitally savvy grandparents are increasingly becoming the norm whereas none of us urban young professionals are using anything like webcams.
The theory goes as follows: the pre-baby boomers, retired yet healthy and engaged, have the time to learn and adopt powerful new technologies and the motivation to do so: whether to stay in touch with increasingly dispersed children and especially grandchildren, or to more actively manage their capital (increasingly important given lengthening life expectancies and more active retirements), or to organize their active travel and social agendas.
Less obvious – but I think also important – is that, having left the traditional rat-race, they have less fear, less of a chip on their shoulders than the slightly younger baby-boomers. They have nothing to lose. The baby-boomers, having spent a lifetime driving change and being ‘in charge’ and now settled in the proverbial corner office, suffer from a collective ‘not-invented-by-us’ disdain and clearly have the most to lose (if the proverbial rules of the game are changed.)
The implications of this digital generational barbell are clearly significant for many sectors of the economy. However for financial services firms its importance is impossible to overstate. And for the most part I don’t think the industry has really come to grips with this. (BBC reports: “Online banking boom for over 55s”):
The recent boom in internet banking has been greatest for people aged over 55, a report suggests, with 3.6 million of them banking online last year.
The Association of Payment Clearing Services (Apacs) said between 2001 and 2006 the number of internet bank users in this age group rose by 350%.
This compared to a 175% rise in the total number of adults banking online.
That means 17 million adults in the UK banked online last year, compared with 6.2 million in 2001.
“While younger people continue to make up the majority of online banking users, the greatest proportion of new internet bankers are the over 55s,” said Sandra Quinn, from Apacs.
*the term barbell in markets originally referred to replicating a position in a medium maturity bond using a combination of very short and very long duration securities (leading to a gain in convexity); it has however become generalized to mean any strategy that uses two extreme elements (often instead of a more traditional ‘mainstream’ element), for example investing in ETFs and Hedge Funds (instead of in a traditional long-only mutual fund.)